We all know the expression “where there’s smoke there’s fire,” right? Well if you follow events at Robinhood (the commission free stock trading platform), you might feel you are following an arsonist. Fires just seem to continually pop up all around them and the smoke keeps billowing up.
So Robinhood is preparing to go public and, of course, valuation and possible pricing is all over the board. Could be $30 billion. Could be $40 billion. Or, could be……?????? Or it might make sense to practice fire prevention. As Smokey the Bear says, “Only you can prevent forest (Robinhood) fires.” The pioneering online discount broker has been credited with stimulating a retail-trading boom over a very short period of time. Yea, Super. But it seems they are also very……ah, loose……in running the business.
Fresh in everyone’s mind is the GameStop “event” where a Reddit chatroom guru rounded up a posse of other chat-roomers to create a short squeeze in GameStop’s stock. When the stock ran up from around $20 to over $475, a hedge fund (Melvin Capital) that was short needed a multi billion dollar bailout to stay afloat. BUT WAIT. Robinhood also needed a quick cash infusion to be able to stay in business. Pesky clearing firm stuff. It seems Robinhood did not fully understand capital requirements, or worse yet, have controls in place to be prepared.
But that seems to be a trend at R-Hood. Years ago the company announced plans to offer a savings account but sort of, kind of, forgot (or, worse yet, didn’t know) they needed to have a banking license. Oh, and Reuters has just discovered another “goof” that R-Hood apparently neglected to report OTC trades in fractional shares that it executed for customers over the last year, a mistake that could warrant another fine for the company. No biggie? More sloppiness.
So Robinhood in a very few years has managed to become the target of roughly 50 class action lawsuits regarding trading app outages, lax risk management, filing failures and been fined multiple times by regulators (although lightly). In fairness, other firms have experienced similar discrepancies at various times, but certainly not to the extent R-Hood has. And certainly NOT in over such a short period of time. So, what does a game-changing brokerage darling do with all these “issues?” Why go public of course.
Every trader or investor is constantly looking at trends in financial markets to make informed decisions. So think of this. Your teenager gets their drivers license and in the course of two years gets multiple traffic tickets. Speeding, running red lights, illegal turns, etc etc. Think they should keep their license? Is a DUI next? Maybe they should be required to repeat drivers education before being allowed to get their license back? Or, maybe your teenager AND R-Hood need a time out (Hello SEC) before letting other people ride with them (like an IPO).
But again, in fairness, it sure is really easy to open a trading account with Robinhood. And they are cheap.
Bill Taylor is Chief Investment Officer at Entoro Wealth and a frequent contributor to Digital Wealth News